GCC will be a US$2 trillion economy by 2020’

Tuesday, 26 May 2009 12:05

A NEW ECONOMIST Intelligence Unit report, 'The GCC in 2020: Outlook for the Gulf and the Global Economy', forecasts that the GCC will be a US$2 trillion economy by 2020. The report, sponsored by the Qatar Financial Centre Authority, examines likely developments in the GCC over the next decade, and explores how the region’s relationship with the global economy might evolve. The findings are based on long-term forecasts and projections from the unit, along with a programme of in-depth interviews with experts on the region.

"Our report demonstrates the growing development of the GCC as an economic and trading hub," said Jane Kinninmont, an editor and economist at the Economist Intelligence Unit and author of the report. “However, there will be challenges for the region to overcome, including increasing global competition for migrant labour as the world’s population ages. The fortunes of member states could diverge as some states diversify their economies faster than others and as some face declining oil and gas production; further economic integration will require strong political will.” Key findings from the report include the following: The GCC will grow in importance as an economic and trading hub. In 2020, the GCC is projected to be a US$2 trillion economy, providing nearly one-quarter of the world’s oil supplies as well as increasing quantities of petrochemicals, metals and plastics.

As economic weight gradually shifts southwards and eastwards, emerging markets will become increasingly important trading partners and investment destinations for the GCC. Gulf investors and sovereign wealth funds are likely to diversify their assets into Asia and Africa, and the region is likely to export more of its oil to industrialising countries. There is likely to be closer economic and political integration between GCC countries. Under the Economist Intelligence Unit's core scenario, the GCC is likely to continue gradual efforts at economic integration, including a single currency, a single central bank and greater harmonisation of legal and regulatory environments. But political will is key - economic integration will depend on good political relations.

But formal political integration will remain elusive, with a common foreign policy or a strengthening of shared security forces remaining a longerterm project. Monetary union will be in place and there may be a shift from the dollar peg. By 2020, it is likely that the GCC countries will peg their common currency to a trade-weighted basket of currencies, although one or two states may opt out. Any such basket will be heavily weighted towards the dollar - unless there is a global shift away from the practice of trading oil in dollars. Commodity prices (e.g. for oil and gold) may also be included in the basket.

There will be a greater focus on manufacturing. Production of hydrocarbons in the GCC could rise substantially by 2020, but one likely trend is that the region will be seeking to export a smaller proportion of its oil as crude, which is a low value-added commodity that offers few employment opportunities. Instead, GCC states will aim to turn more of their oil into refined products or petrochemicals, and to use their oil and gas resources as feedstocks for industries that will add more value and provide more jobs. However, the GCC will remain dependent on foreign labour by 2020 despite a range of efforts to encourage the employment of nationals. GCC spending on food imports will more than double from US$24 billion in 2008 to US$49 billion by 2020.

An important reason for this growth in imports is water scarcity, which means that domestic agricultural production tends to be costly. Between now and 2020, GCC countries will explore wide-ranging purchases of agricultural land in regions such as Africa, Central Asia and Southeast Asia, in order to strengthen food security. While these investments could boost agricultural production in poor countries, there is a risk of political backlash, especially in times of food shortages.